The Overnight Report: The Volatility Subsides

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By Greg Peel

The Dow closed down 13 points or 0.1% while the S&P fell 0.2% to 1407 and the Nasdaq lost 0.2%.

One might have expected Wall Street to tumble last night. The Republican proposal for Cliff was announced right on the death before the close on Monday, allowing no time for either the market or the Democrats to respond. Last night the president suggested the proposal is "out of balance" if the Bush tax cuts are extended, as is the Republicans' plan. John Boehner suggested the Republicans were the only party acting "in good faith" in an attempt to reach a compromise, so how about the Democrats do likewise. On face value, little common ground has been gained.

Last week this may well have sparked a sell-off given we appear to be no closer to resolution. This week, however, it appears Wall Street is sick of running backwards and forwards to get nowhere. One wonders whether the algo-driven momentum trades so prevalent last week have proven to be net losers, so rapid have been the swings. If computers are the only real players in the market then amongst them will be winners and losers. There seems to be growing faith a resolution will be reached. It's becoming less and less important what that resolution looks like ? Wall Street, Main Street and everyone in between just wants to know where they stand. End the uncertainty, and the feeling is Wall Street wants to be bullish.

This hasn't stopped a rapidly growing number of US companies issuing special dividends in the past couple of weeks. Dividend tax (there is no franking in the US) is one of the points of contention with the Democrats looking for an increase beyond the current 15%. Distributions made in 2012 will still only attract 15% tax. Capital gains tax, also 15%, is another point of contention, hence profits are being taken on winning positions. Nowhere is this more apparent than in gold which, while aided by options expiry volatility, fell US$20.10 to US$1696.80/oz last night.

Meanwhile back in the real economy, we have begun to see US data releases, which might otherwise have maintained the positive trend, but have been impacted by Sandy. Last night's November vehicle sales number was very much impacted by Sandy. But this time it's the other way around. Vehicle sales rose by 15% in the month ? the best result since before the GFC. It's a blip, however, given Sandy damaged and destroyed many vehicles and they have had to be replaced.

All up it was a nothing day on Wall Street, with the indices bungling along in a modest range.

On the currency front, the big news of the day came from downunder. The RBA's 25 basis point cash rate cut to 3.00% was the talking point, as was the fact the Aussie shot up on the news. Buy the fact? Maybe, but while the RBA has noted the strong Aussie and its economic drag in statements for several months now, outside of some non-rebalancing of positions as part of regular open market operations (effectively pumping a bit of Aussie on the balance sheet into the system to ease the upward pressure), the central bank has not intervened nor shown any indication of doing so. Glenn Stevens is the Robinson Crusoe of the central bank chief fraternity.

The impetus for the Aussie's rise may well be derived from the final paragraph of the RBA's statement yesterday (I've added the emphasis):

"Over the past year, monetary policy has become more accommodative. There are signs of easier conditions starting to have some of the expected effects, though the exchange rate remains higher than might have been expected, given the observed decline in export prices and the weaker global outlook. While the full effects of earlier measures are yet to be observed, the Board judged at today's meeting that a further easing in the stance of monetary policy was appropriate now. This will help to foster sustainable growth in demand and inflation outcomes consistent with the target over time."

Compare this to November's statement:

"Further effects of actions already taken to ease monetary policy can be expected over time. The Board will continue to monitor those effects, together with information about the various other factors affecting the outlook for growth and inflation. At today's meeting, with prices data slightly higher than expected and recent information on the world economy slightly more positive, the Board judged that the stance of monetary policy was appropriate for the time being."

The implication here is that 3.00% is enough for now. There are signs the earlier cuts are working, and this last one will be the cherry on top. No mention of further "monitoring". Policy is "appropriate now", rather than "appropriate for the time being". The forex market took this to imply that generally held expectations of another cut in the new year, and perhaps even two to 2.50% may be off the mark. Hence the rally in the Aussie which, of course, only exacerbates the problem.

The end result is an Aussie up 0.5% to US$1.0475. The US dollar index has fallen 0.3% to 79.65, which makes the fall in gold even more notable.

Base metals were flat to 1% weaker last night after earlier, China-inspired strength, but the spot iron ore price has seen a bounce-back, rising US$1.80 to US$117.10/t. The oils were also around a percent weaker, with Brent falling US$1.08 to US$109.84/bbl and West Texas falling US62c to US$88.47/bbl.

The SPI Overnight was up 5 points.

It's GDP day today in Australia. The market had been expecting 0.6% growth ahead of the September quarter reports of the past few days, matching June quarter growth. This would bring the annualised growth number down to 3.1% from 3.7% in June.

HSBC will release its measure of China's non-manufacturing (ostensibly services) sector today. Monday's official figure from Beijing showed a tick up to 55.6 from 55.5 which is a lively pace of growth.


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